China shares rise, but analysts split on next hike

V.Phani Kumar

HONG KONG (MarketWatch) — Chinese shares looked past the People’s Bank of China’s latest interest-rate hike to rise Wednesday, but analysts remained deeply divided on further scope for tightening as inflationary pressures persist amid some signs of a slowdown in growth.

A day after the PBOC lifted its benchmark one-year lending and borrowing rates by 0.25 percentage points each to 6.31% and 3.25%, respectively, the Shanghai Composite Index (SHCOMP) climbed 0.8% to 2,992.06. Following its path, the Hang Seng Index (HANGSENG) rose 0.5% to 24,279.15 in Hong Kong.

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Economists at China International Capital Corp. and Capital Economics are among those who expect the Chinese central bank to rely on liquidity controls, rather than on blunt instruments such as interest-rate hikes, to control inflation.

On the other hand, Credit Suisse economist Dong Tao expects China to raise one-year lending rates by as much as another 1.35 percentage points this year, and deposit rates by 1.50 percentage points.

Estimates on further interest-rate increases from many other economists fall somewhere in between. Some anticipate that Beijing will likely tighten its monetary policy less aggressively and perhaps not as frequently in coming months.

“We think there will be another two to three interest-rate hikes this year, because inflation will probably turn out to be more persistent than the market expects and also the government expects,” said Wei Yao, China economist at Societe Generale in Hong Kong.

She doubted the possibility that China’s monetary tightening was nearing an end, due to inflationary pressures from high commodity prices, monetary conditions that were still “relatively loose,” and a “really strong” growth in wages.

“We think this tightening cycle may extend much longer than the last one, but with less frequency,” Yao said, adding that she also expected two to three more increases in commercial banks’ reserve requirement ratios in the remainder of this year.

Latest in a series

They come on top of nine half-point increases in commercial banks’ reserve requirement ratio over the last several quarters, a gradual appreciation for the yuan against the U.S. dollar since the middle of 2010 and other measures, including price caps or controls on food items, consumer products and fuel, as well as power costs.

Annette Beacher, TD Securities’s head of Asia-Pacific Research, noted that despite the four rounds of interest-rate increases so far this cycle, China’s lending and borrowing rates are still currently lower than the peaks of 7.47% and 4.14%, respectively, before the global financial crisis erupted.

“We forecast another [0.75 percentage point] of tightening to be delivered to both deposit and loan rates,” Beacher said.

Tuesday’s rate increase came ahead of the release of a slew of economic data later this month, including the gross domestic product growth figure for the first quarter, as well as March’s inflation, retail sales and industrial-production numbers.

Several economists expect the March consumer price index to show a rise 5.2% or higher from the year-earlier period, and they see Tuesday’s rate hike as a move to cool the inflationary pressure that will be reflected in those figures.

It’s also plausible that Chinese officials have seen the advance estimates of the first quarter’s GDP data to be released in a few days, and “have been reassured that the economy is strong enough for tightening to continue,” Capital Economics’ senior China economist Mark Williams wrote in a note to clients.

Market reaction

China’s stock gains Wednesday were led by banks and insurers on hopes that they stand to benefit in a rising interest-rate environment, although some property developers skidded.

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